NEW YORK / HONG KONG (Reuters) – Global banks are seeing renewed appetite from wealth management clients to borrow money to buy stocks as markets rebound, said bankers, who comes just a few months after the strategy burned some investors.

FILE PHOTO: A US dollar banknote appears in front of a stock chart in this November 7, 2016 illustration. REUTERS / Dado Ruvic / Illustration / File Photo

Low interest rates as central banks support the global economy and the rapid rebound from March lows are leading investors to turn to margin accounts, where they borrow money from the brokerage house to buy assets, in order to increase profits, several bankers familiar with the matter said.

Aggregate customer margin debit balances in the United States, which include both retail and institutional margin loans, reached $ 525 billion in April, from $ 479 billion in March, according to data from the Financial Industry Regulatory Authority. The balance is still lower than the $ 562 billion at the start of the year.

While clients did not return to margin borrowing at the pre-crash level, “things are better than a month ago,” said Murtuza Rasiwala, Americas head of banking, custody, Escrow and Margin and Security Backed Funding at Citigroup Inc.

Rasiwala said there were “certain pockets where clients who did not have additional cash to inject had to liquidate their wallets.” However, he said the rebound had occurred quickly “so that clients who had cash on hand could support the portfolio during this brief period.”

Adam Holtzschue, head of core banking for Wells Fargo Wealth and Investment Management, said that “disrupting the market was a challenge for anyone with long or short exposure,” but added that using the effect of leverage by clients was “conservative”.

Some investors saw the stock market crash as a buying opportunity.

US stocks rebounded quickly from their March lows, with the Nasdaq posting a record high closing Monday and the S&P 500 index about 4.5% below its record high.

Another sign of risk appetite is the lending of individual stocks – often seen as a higher risk activity – seems to remain attractive. Philipp Wehle, head of Credit Suisse’s international wealth management division, said such loans are still on offer, as the unit recently embarked on a large single-share trade with a long-time emerging market client.

The surge in interest since the stock market crash is good news for banks, which typically make money from both the loans they make to investors and the fees they charge them. But it also shows how much risk increases in the market even as the coronavirus pandemic continues to wreak havoc on the global economy and new threats to the rally emerge.

Some investors who borrowed to buy stocks suffered losses when markets fell earlier this year, as several banks quickly liquidated collateral they held against those loans, securities lawyers and bankers said. private.

“A lot of people didn’t realize how risky they had taken all these years during this bull run,” said Matt Wolper, of the Wolper law firm in Fort Lauderdale, Fla.

Rick Ryder, founder of Securities Arbitration Commentator, said in an email last month that he expects a significant increase in client litigation and new arbitration cases at FINRA due to the fall in the market in February March.

These disputes also increased during the 2007-2009 period, after the financial crisis, according to FINRA data on cases filed and closed.

Yet margin lending remains a lucrative business for banks. It is difficult to measure how lucrative profitability is, as banks usually do not break down the amount drawn on these loans.

However, it can be a source of losses for banks if the markets collapse. This time around, some securities attorneys and bankers familiar with the matter said the banks had moved quickly to liquidate collateral and minimize their losses.

Some are tightening the standards further now that margin accounts are making a comeback, being more cautious about the types of securities they lend against and the amount of leverage used, the bankers said.

“The market chaos of March was kind of a wake-up call for all of us,” said a banker from a European wealth manager who manages more than $ 200 billion in client assets.

Additional reporting by Brenna Hughes Neghaiwi; edited by Paritosh Bansal and Lisa Shumaker

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